Korea first bank

Graduate School of Business Administration University of Virginia

UVA-F-1386

RISK EXPOSURE AND RISK MANAGEMENT AT KOREA FIRST BANK

It was the end of December 1998, and Mr. Dong-Hyun Kim, Chairman of the Board of Managing Directors and President of Korea First Bank (KFB) was reflecting over the last two tumultuous years, by far, the most challenging years in the 70-year long history ofKorea First Bank. As many banks in Korea, KFB had suffered tremendously as a result of the Asian Crisis during 1997. However, what was most present in Mr. Kim’s mind were the many problems tha t KFB was entangled with, even in the absence of the crisis, most notably, the exposure of KFB to Hanbo Steel, a member of the Hanbo chaebol, whose bankruptcy in January 1997 threatened the mere existence ofKFB. Not only was KFB’s exposure to Hanbo disproportionally large, but also this large exposure was allegedly facilitated by large commissions received by the previous president of KFB. Both he and the president of Cho Hung Bank were arrested early 1997 for their involvement in the case. 1 Was this event something that KFB would be able to disassociate itself with and move forward, or was thissomething that was lingering and might manifest itself in a different way in the future? Were there other types of operational risk that the bank had yet to identify? Mr. Kim took a pen in his hand and started jotting down all the types of risk that the bank faced: credit, interest rate, exchange rate, market, liquidity, and operational risk. How were all these risk exposures identified and managed atKFB? What could KFB have done differently during the last two years to have managed those risks better, so that it could have weathered the Asian crisis and the downturn in the Korean economy? What should the Korean government or the international regulators have done differently, so that KFB would not have reached the brink of collapse? He immediately started poring over the annual reports ofthe past two years (Exhibits 1 & 2 show consolidated balance sheet and income statement information). He was determined to propose the conduct of an exhaustive study of risks and risk management actions at KFB in the next meeting of the Board.

1

See Thompson Bankwatch Inc., Korea First Bank Report, February 11, 1997 and September 27, 1991.____________________________________________________________

_________________________________ This case was prepared by George Allayannis, Assistant Professor of Business Administration. This case was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2002 by the University of Virginia Darden School Foundation, Charlottesville, VA (revised 2003). Allrights reserved. To order copies, send an e-mail to dardencases@virginia.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

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UVA-F- 1386

The Korean Banking System The Koreanfinancial system has been largely controlled by the government. Government intervention is more prevalent in the banking system, where often credit is directed towards industries that are deemed critical by the government to Korea’s economic development. 2 This policy was quite successful in the 1980’s; however, as the economy continued to grow during the eighties and became more diverse andmultifaceted, the apparent inefficiencies in the system were ultimately revealed. In the 1980’s the first wave of bank privatizations took place, when 5 banks were privatized. But, it was not until 1993, when the new government devised its 5-year financial reform plan, that the first steps towards banking deregulation, liberalization of the market, capital flows and foreign exchange took place. The...